Can you tell me a bit about your background and your current role?
So as far as my background is concerned, I am an international development banker with over 40 years of work experience of which 26 years with the World Bank Group, mainly working in developing countries around the world. A large portion of my experience has been with banks and other financial institutions to build their capacity to be able to reach out to small and micro businesses for, what we now know as financial inclusion. This involves a lot of work like assessing these institutions for their weaknesses, transforming them into institutions which can increase outreach, assessing them for their ability to borrow lines of credit and then to onlend these, and so on. This has been sort of the crux of the work I’ve been doing and technology has formed a large part of this work over the past 6 to 7 years because it tremendously enhances the ability of financial and banking institutions to deliver their products and services more widely, more deeply and more efficiently, thus having better impact on economic development. Today, I am still involved in all this through the various boards I sit on and through my role as mentor and advisor to startups, fintechs and other businesses.
Can you tell us more about Fintech and its importance today?
Of course, we have all seen the rise of these financial technology companies, the Fintechs as we know them, over the past decade or so. The reason for them to gain prominence was because there was a gap between what the formal banking and financial institutions could do in terms of assisting smaller businesses, entrepreneurs and startups, and what was actually required. This gap was filled in by Fintechs; and that is their importance. The reason this gap existed is because the larger banks and financial institutions the legacy institutions as we now call them, were unable to reach out to such businesses, mainly owing to their inability to assess the risk involved in such segments of the market. As we know banks, while they are in the business of taking risks, have a certain type and limit of risk appetite. And that limit is because there is a great deal of information asymmetry within the SME segment and these large banks do not know how to deal with that and hence do not venture to tap that part of the market leading to financial exclusion.
With the advent of technology and also with the availability of data, fintechs were able to better assess the risks involved and narrow the supply-demand gap. Today, there is an abundance of data, which if leveraged intelligently and responsibly allows such risk assessment to be carried out more productively, more accurately and with much more speed allowing better outreach. The reason Fintech has done this is because they’ve been more agile, and banks have not been quick enough to adapt that technology. Although banks have started on the journey but as they are bigger institutions with much more bureaucracy, it takes them a longer time to reach that stage. Fintechs were able to reach it sooner. Now what has happened is that Fintechs have made a mark for themselves, and they are able to command a position, in which banks would now want to work with them and partner with them. This is because banks have also realised that for them to reinvent the wheel or to try and develop technology-driven platforms would take them much longer. Today, banks are able to pick and choose the fintechs to work with. That is the importance of Fintechs in this context.
What’s Gone Wrong with Traditional SMB Banking?
The issue with small businesses has always been that the financial institutions have not paid enough attention to them and the reason for that is because they had no clue what these businesses were about and how to assess the risk if they wanted to provide them with financial or other assistance. That’s one reason. The other issue is that even if small businesses were able to access financing they were many times clueless of how to structure the borrowing and how to use it productively. In short, they need a lot of hand-holding and advisory services; something that traditionally was never provided to them. How this has evolved over the years and the reason it evolved before that is because government and even financial institutions have now realised that these small businesses comprise a large chunk of any economy, of any country. Anywhere between 60 to 98% of the businesses in economies of the world are small and medium enterprises and they also contribute a great deal to the GDP of countries. Again, anywhere between 35 to 65% of GDP comes from these small businesses. So, that’s something which has now been realised and hence there’s a focus mainly by governments on these small businesses. Of course, also the fact that these small businesses are set up by entrepreneurs and there is a big push to promote entrepreneurship for the simple reason that they are not enough jobs and people need to start thinking of how they can be self employed. For them to be a self employed there is need for an ecosystem which assists them along this journey and one of the components of that ecosystem is the financial and banking services, and the advisory services, which are now being built. So, what Fintechs have done and what technology has enabled is that the delivery of both financial services and advisory services has improved a great deal. And because of such improvement the outreach has been enhanced. That is why when we talk about financial inclusion what we mean is that these services can now reach out to more and more people. Of the more than 2 billion people that were excluded in 2017 approximately 700 million have been excluded over the past 3 years, mainly owing to use of technology. Most of them are small or micro. So, the landscape is changing and we will see even more change, as and when banks, which have the client base, start leveraging technology better. The question is that they need to understand how they can leverage that technology and how they can partner with Fintechs. I think this next few years we will see a lot of these partnerships happening and the outreach increasing.
What is the future of digital banking?
So, like I said earlier the future of digital banking is that we will see more of it. This is something which is market driven, it is something which is outcome driven. So, it not only provides an answer to enhanced outreach, but it also provides enhanced customer experience and client experience, and these are things which the market is demanding on either side of the spectrum. The more sophisticated entrepreneurs, in more developed countries, want a better client experience when they do their banking. In countries of Asia, in countries where most of the population is excluded, digital banking will enhance the ability for banks to bring these unbanked into their reach. That is what digital banking is about- whether it’s for customer experience, whether it’s for increasing outeach, whether it’s for improving KYC and other processes, such as credit assessments, credit delivery, RegTech, etc. we are going to see a growth in digital banking.
Will banks eventually migrate to a cloud and what hardware they will keep?
Over the years another lesson that has been learned is that financial institutions/banks, don’t really need to build an in-house capability or capacity to store and use data. We are now more moving towards what is called open banking- where the bank opens up its platform to service providers in different areas. I mean it could be not just banking it could actually be other sorts of services like booking an airline ticket or reserving a table at a restaurant, which can be embedded into a banking product itself or a banking app itself. In order to enable access for 3rd party providers of services, through these apps, cloud is going to be something that is going to be more used in the future. It’s already become mainstream in many countries. The only reason why it’s not that popular or that’s not being used that much is because of the regulatory frameworks, which surrounds it. This actually brings me to something which I should have mentioned earlier. All that we say about the rise of the Fintech, the ability of banks to go digital – regulations will need to keep pace with all this and re-framed to allow this growth to take place. We all know that this is something that is always lagging. So, we have all these market driven solutions but the regulatory frameworks around them take time to be developed. Like I always like to say, “Regulations follow Innovations”. The best way to keep pace is through periodic and regular dialogue between both the innovators and the regulators so that they can understand each other and understand what issues are being addressed and what regulatory framework is needed. This not only enhances the ability for such innovation but also protects the system itself; a delicate balance for any regulator – but part of the job.
What do you think is the future of the Fintech industry in Asia?
Asia is where fintech is. Judging from the past where we have seen countries like China, Singapore, Hong-Kong, India, – we all know the story – we have seen a rapid growth in financial technology firms. The other reason why Fintech will continue to grow here is that a major part of the world’s financially excluded, more than 50%, are located in Asia. More and more, even formal institutions, are now going to leverage technology and digitalize processes and leverage existing Fintechs for various processes from on boarding to credit process, to KYC, to compliance reporting, Regtech, to collections. Most of these are “work-in- progress” Today most of the Fintechs are in the transaction payments space. We will see more Fintechs getting into the Regtech space, into the collection space, into the space where they need to improve the credit processing turnaround time. And so on. So, yes, the future of Fintech in Asia is that there will be more growth and more innovation. They still need to reach out to more than half a billion people and include them into the formal financial sector. And the only way that can be achieved is if we have finance and technology combined to enable that.